The Fairness Doctrine
An idea whose time has gone. There are more than two sides to any issue of interest, and attempting to give them all equal representation would take more energy than the trivial public benefit that might result. The actual system would, of course, simply involve a bureaucrat deciding what is "fair". I expect that this would be about as effective as having a bureaucrat determine "what is art".
Anti-"gouging" laws
Another incredibly stupid idea. Actual gougers get punished by the market, because no one buys their goods, and the neighbors remember. These laws are more frequently deployed against vendors who are selling goods that have suddenly become scarce, like gasoline generators after a hurricane. This discourages conservation. Moreover, the spiking prices generally attract new supply to the area, which is a good thing. People in a disaster area who can't get their hands on generators are no doubt comforted by the fact that at least they didn't pay too much for the privilege of sitting in the dark without refrigeration.
Your favorite economists, (1) all-time and (2) current (maybe the same).
My favorite historical economists are the standard list. I am too wise to make "Who do I love more lists" for public consumption, but on a personal basis, am very fond of the Fabulous Mason Boys, Austan Goolsbee, and Bart Wilson of Chapman.
Do you consider rent control a form of anti-gouging legislation? How about credit card interest rate limits?
Yep, bureaucrats would be in charge of public grants for the arts, not recognized public experts in the particular fields.
It really is easier to deal only with straw men, isn't it?
Gouging
First, a workable definition would help.
In the hurricane/ice storm scenario, nobody is forced to pay the price for the product or service which is available, but at a higher price than would have been the case in the non-hurricane/ice storm scenario.
Generators available at a higher than normal price are only saleable if no generators are available through the normal channels at the normal price. The alternative is no generators available at all.
On Penn Jillette's wonderful but short-lived radio show, he would discuss why drowning puppies was a bad idea and that the fairness doctrine would require that he give equal time to the opposing position.
You really believe that Wal Mart, Home Depot,CVS,and the regional grocery chains require a major spike in prices to supply a disaster area as soon as they can?
If that is you view of the management of major American corporations you are not a libertarian--
you are a marxist.
The econ talk below tells a wonderful story on how stupid and harmful anti gouging laws are in times of emergency...
the interview is with Mike Munger..
In 1996 Hurricane Fran hit the east coast...
many places were in dire need of ice..(could be life and death for some people)
Anybody can make ice (all it takes is water and electricity)...
Places without electricity went days without ice... eventhough electricity and water was only less than 100 miles away...
People who tried to bring in ice were arrested and the ice confiscated becasue the price was too high..
Ice at a relatively high price is better than no ice at a low price...
http://search.everyzing.com/viewMedia.jsp?res=311524252&dedupe=1&index=10&col=en-aud-public-ep&e=1078375&il=en&num=10&scol=pod&s=PZSID_0000010109&mc=en-aud&start=0&q=munger&expand=true&match=query,channel&filter=0
Spencer,
Not sure what you're getting at, but it's been quite a while since the notion that higher prices increase supply has been challenged. Are you suggesting otherwise?
[i]Not sure what you're getting at, but it's been quite a while since the notion that higher prices increase supply has been challenged. Are you suggesting otherwise?[/i]
I'm not an economist but this seems very unintuitive.
Yeah, the Fairness Doctrine is awful. Especially in those situations where there the 'other side' is flat out wrong (ie. Intelligent Design, Moon Landing Hoaxes, Flat Earthers, etc)
This is a basic tenet of economics, so it's not too difficult to come up with examples.
Lets say that producing more generators from the GE factory is possible by adding a night shift to work midnight-8am. Because it's a crappy time to work, GE has to pay higher salaries to its night workers in order to attract enough.
If they were making $20/unit before the storm, and it costs $25/unit more to make extras, they won't make them unless they can raise the price. If generator demand spikes and they can raise prices, then they'll make more, but if they're mandated to not raise prices, then they won't make more.
An increase in demand for an item causes less efficient means of production to be implemented in the short run, because they become profitable where before they weren't.
My comment above was directed at themightypuck, and I'm a different Peter from the first poster. I need to pick a new tag.
themightypuck,
Peter captures it partially, but with a disaster, the costs are in transportation. We tend to forget, in our daily lives, the incredible value of a functioning bridge and a debris-free road. Moving supplies into a disaster area is expensive. Forcing people to charge the same prices as they would during a time when transportation is relatively cheap means that they probably will lose money on the transaction, which in turn means they won't bother.
Re: People in a disaster area who can't get their hands on generators are no doubt comforted by the fact that at least they didn't pay too much for the privilege of sitting in the dark without refrigeration.
As always theory must be tested against reality, and this assertion fails that test. I lived in Florida for five years. Florida has very strict anti-gouging laws which are invoked during hurricane emergencies. These laws do NOT prevent HomeDepot from stocking and selling generators, plywood and other emergency supplies. As long as they can sell these goods at a reasonable profit (and by selling them at normal price they can do so) then they will continue to sell such goods.
The opportunistic entrepreneurs who bring otherwise unavailable goods into areas where those goods are in high demand also have higher acquisition costs. They are typically not high volume, direct ship customers of the manufacturers. Rather, as in the case of emergency generators, they are buying them at retail in areas where they are available and moving them to the areas where they are in demand. Therefore, at normal retail, their margins (including transportation costs) would be negative.
Another group which is frequently demonized is hotel/motel operators. Their response has been to post very high "normal" room rates, then discount heavily except in periods of very high demand. As long as they do not exceed the maximum room rate posted on the back of the door, they are OK.
The opportunistic entrepreneurs who bring otherwise unavailable goods into areas where those goods are in high demand also have higher acquisition costs.
But that's not the case. Home Depot has 200 generators that they bought at their normal price. Disaster hits and they triple the price of those generators to make a short term profit off of the disaster. They don't get any more in their stores until the roads are re-opened and they take normal shipments at the normal cost. Somehow I doubt that any of the big stores are paying that much extra for items they sell in disaster areas. Any proof that they do?
The major effect of an anti-gouging law in the case of plywood shortage due to a hurricane would be to ensure that the families and friends of every Home Depot manager in Florida are made reasonably more secure at the cost of everyone else.
@JordanT
Your proof is in the answer to this question (its a tough one...):
If you can sell a generator for 300 dollars, and thus are willing to buy generators for 250 dollars or less, how much are you willing to buy a generator for if you can sell it for 1000 dollars?
how much are you willing to buy a generator for if you can sell it for 1000 dollars?
That's not proof, you haven't proven that your theory actually plays out in reality. Your hypothesis is that's the truth, but you have provided zero evidence that the hypothesis is correct.
@JordanT
Let me put it this way: if you would only be willing to pay the same 250 dollars or less, don't expect Home Depot to hire you as a manager.
Megan, where were you duing the 2003 blackout? Remember the bodegas charging $5 for bottles of water as they were getting warm. Now multiply that scenario to an big natural disaster. If every vendor is taking advantage of consumers through gouging, then it's a situation that cannot stabilize itself.
And your advice is for people to suck it up and wait until it does stabilize? Wait for the market to put the gougers out of business?
Don't pass anti-gouging legislation because that would be to interfere with the sacred Market?
Again, the example of New York....I mean, Manhattan, where we pay more for gasoline and milk not just because of rising energy prices, but because a lot of vendors get away with modest gouging. AG Cuomo has his hands full with gouging complaints.
Let me put it this way: if you would only be willing to pay the same 250 dollars or less, don't expect Home Depot to hire you as a manager.
You keep making the assertation, but you have no proof that a home depot manager actually goes out and spends more money on generators. Or that they have the ability to get extra generators if they are willing to pay more. Can GE really re-tool and put our more generators in 2-3 days time, even at higher costs? Or would it require the building of another factory, which can't be done on such short notice? You have a hypothesis without proof, and just because a hypothesis makes sense doesn't make it true. I would say they just gouge on the price, but there is no value added for it. The only reason they can sell them for that much is by taking advantage of people's fear during a natural disaster.
Expecting a bureaucrat to determine what is fair...
Couldn't one argue that the job description of a judge is exactly that?
I have no problem with the economic theory that higher prices induce greater supply. But we should apply it where and how it is suppose to be in the meaning that higher prices induce new producers to come on line with a lag and produce more supply.
The way higher prices work in economic theory is they induce greater production. It is not some magic nose wiggling thing that produces additional supply out of thin air.
In particular, it does not apply to the way modern American corporations respond to disasters. Wal mart, Home Depot, CVS, etc., etc., take great pride in how they respond quickly to resupply disaster areas after a disaster at normal everyday prices.
That is what I am referring to when I say that the
claim that higher prices are needed to induce greater supply after a disaster. It does not apply to the modern American economy.
The proverbial guy selling items out of the back of a pickup truck is someone taking advantage of a very rare complete absence of competition to collect economic rents from the victims.
Check your textbook. A market requires competition and the libertarian fantasy completely fails to take this requirement of markets into consideration. They are claiming a market failure -- the complete absence of competition -- is a beautiful example of how markets work. It is a complete and utter misapplication of economic theory.
Can GE really re-tool and put our more generators in 2-3 days time, even at higher costs?
No, but the existing retail inventory can be transferred from non-disaster areas to disaster areas. This transfer is expensive because it does not involve the usual channels, may require elaborate detours and delays, and may require small lots to be brought from scattered locations rather than the weekly truck from the warehouse. Unless the higher costs can be recouped, nobody will attempt the transfer.
If every vendor is taking advantage of consumers through gouging, then it's a situation that cannot stabilize itself.
Of course it can. If there are above normal profits, then people and corporations can move to arbitrage them away by shipping more supplies into the disaster area.
Granted, it seems unfair for Home Depot to sell a $200 generator for $1000. But if the price is simply capped, then they'll sell what they have for $200 and nothing else will be shipped into the region because the cost of getting it there is much higher than the sales price. Is it better to have a $1000 generator or no generator at all? Why is that decision being made by the government rather than the families who actually have to live with the decision?
Finally, notice that there is no monopoly at work here. Home Depot, Lowes, Wal-mart, and your mom 'n' pop hardware store can all bring in generators and compete with each other on price. They can't set prices arbitrarily high because their customers will go elsewhere.
Wal mart, Home Depot, CVS, etc., etc., take great pride in how they respond quickly to resupply disaster areas after a disaster at normal everyday prices.
This is in all probability a PR move rather than a profitable one.
Furthermore--in an amusing big-government twist--it may violate the anti-predatory-competition laws; if they are selling items below cost, they are "unfairly trying to put small businesses out of business."
One must always remember that retailers are not the only source of goods in a disaster area, and not even the largest stores of such goods. A rising price for a high-demand item encourages the liquidations of private hoards, both inside and outside the disaster area.
A price ceiling lower than one a free market would set guarantees a shortage. This really is Econ 101. A rising price is a signal to both increase supply and decrease demand. If you can really deny this fundamental truth, then there is no point in wasting time discussing it.
JonF,
I'm guessing that your five years in Florida (enough to make anyone an expert, surely) either were not spent in the Port Charlotte / Punta Gorda area, or did not include the year following hurricane Charley, or both.
During the year following Charley it was very difficult to find contractors to do repairs, and many houses still had tarps for roofs more than a year after the storm. Nevertheless, it was still not terribly difficult to get contractor services throughout the rest of the state, even in relatively nearby places like Tampa. Why? Why didn't all those contractors go south to help rebuild Charlotte County (some did, of course, but what about the many who didn't)?
Well, why should they? They don't stand to make any extra money from going to help rebuild, and they stand to incur a lot of extra cost. Even if you can raise prices to cover the extra direct costs, you don't stand to get any repeat business from customers hundreds of miles away, but your local customers will be put out if you put their projects on hold. It just isn't worth it. Better just to stay home, keep your current customers happy, and let the situation down south take care of itself. But, do you think they would change their minds if they stood to make some money off of the deal? I do.
Your glib story about generators at Home Depot doesn't hold up either. Goods like generators are in notoriously short supply after disasters; that's why they always come up in these discussions. Yet, after whenever you have a storm in, say, Jacksonville, it's a safe bet you can buy all the generators you want in Atlanta. Why don't they ship them down to cover the shortage? Answer, there is no incentive for them to do so. They may even lose money on the deal. This is not, as you suggest, theory; it's what actually happens every hurricane season.
You claim that Wal-Mart and Home Depot are successful at resupplying after every disaster at everyday prices (and that they take pride in doing so, no less). If that is true, then how is it that "gouging" is even an issue? Who would buy anything at gougers' prices if it is available just up the road at Wal-Mart? If the phenomenon of "gouging" exists at all, then it's clearly evidence that demand is *not* being met, and supplies are *not* being restored.
Anti-gouging laws like those in Florida only serve to prolong the misery after a disaster. If you really want to relieve suffering, repeal the anti-gouging laws and let people find creative ways of delivering goods and services to devastated areas. Some people will end up paying more, but everybody will get back on their feet sooner (even the frugal ones who wait for prices to return to normal levels), and that seems like a win to me.
The fans of anti-price gouging laws are missing/ignoring a number of important points.
1) By hypothesis the demand for a good after a natural disaster is greater for the goods in question than before the natural disaster. That means that there is not enough stuff on hand to provide what consumers would want to buy at the pre-disaster prices. Forcibly keeping the prices low is not going to change this.
Allowing the market price to go up allocates the supply by willingness to pay. Forcing the prices to be remain at their old price means that the supply must be allocated in some other way. What way do you prefer? First-come first served? What makes this better? What happens to the person who decides that his electricity needs require 2 generators, for backup or whatever reason? Do you sell both to him, or put an arbitrary limit of one? Perhaps he's buying generators for three neighbors and himself, and they are going to share houses. Perhaps he has some medical reason to need continued electricity urgently enough to make having a backup generator is reasonable. Or perhaps his needs are no more urgent that anyone else's and he should make due with one generator. How are you, as a seller, supposed to know this?
2) Selling things in a natural disaster is costly. Suppose you own a mom and pop hardware store. A disaster hits. You have two choices. You can open the store and sell out you inventory for a fairly trivial profit, or you can keep the store locked up and care for your family? Which do you do? Which do you do if you can make an extraordinary profit? These are tradeoffs to be made that have no correct answer that any attorney general can conceivably know after the fact.
3) The potential for extra profit brings forth extra supply. But at a risk. E.g., Home Depot et al ship in emergency extra supplies, at a cost, to a town in the expected path of a hurricane, only to have the hurricane veer off in a different direction at the last minute. Are you going to tax the town's residents to pay Home Depot's extra cost? Because if you don't, and you don't let Home Depot make an extraordinary profit when the hurricane hits, they aren't going to be as quick and extensive in their extra supply shipments, and then where are you? Happy that you're not exploited, or pissed off that you house suffered more serious damage because you couldn't get the emergency supplies to protect it at any price?
As a rule, the people pushing for the anti-gouging laws suffer from an extremely dangerous version of the fatal conceit. Their confidence that "price gouging" can be meaningfully and unambiguously defined, and that non-price allocation mechanisms can be efficiently implemented, lead them to push policies that active hamper the response efforts and, thus, guarantee to make the effects of natural disasters worse than they have to be.
@JordanT
Can GE really re-tool and put our more generators in 2-3 days time, even at higher costs?
Actually, the point is that GE probably CAN'T do that. By "gouging" (a useless word without a workable definition) on the price, people who sell generators or plywood or other items useful for a natural disaster are helping to direct supplies to flow to the places where they are needed most. Without the ability to increase the price, fewer people will get plywood, fewer people will get generators, and everyone will continue to pay the same price while far more people have their windows shattered and lose their electricity.
I would say they just gouge on the price, but there is no value added for it. The only reason they can sell them for that much is by taking advantage of people's fear during a natural disaster.
The value is added by virtue of the fact that an effing huge windstorm is coming, necessitating the immediate purchase of emergency supplies.
There are plenty of real life examples of the market directing goods and services into desperate areas. The people who did this for the south after the Civil War were called carpet-baggers.
Re: I'm guessing that your five years in Florida (enough to make anyone an expert, surely) either were not spent in the Port Charlotte / Punta Gorda area, or did not include the year following hurricane Charley, or both.
I lived in Florida five years (2003-06 in St Petersburg; 2006-08 in Fort Lauderdale). That definitely includes the two straight years of Hurricane Hell. And I stand by what I posted: anti-gouging laws did not keep shelves bare in the state.
First off you fundamentally misunderstand these laws. They do not impose a permanent state of wage and price controls on the state. They take effect only durin hurricane emergencies. Nor do they prevent general market increases in price even during hurricane times. In Sept 2005 (Katrina and Rita era) gas prices in Florida spiked just as they did throughout the nation. No one invoked gouging laws against that price increase.
As to why Port Charlotte (and post-Wilma Fort Lauderdale) had so much trouble rebuilding, the answer lies elsewhere. Now surely you do recall what else was going on in 2004-05: that was the height of the housing boom! The cost of building supplies was going up all over the country, and there were spot shortages everywhere, even though no law prevented suppliers from charging what the market would bear. Nor was there enough labor even for normal projects. It's not as if we can create plywood, copper plumbing or carpenters out of thin air, you know. This isn't the Star Trek world of replicators and transporters. Even infinite money can't acheive that trick. No law prevented the contractors of Tampa from going two hours down the road to Port Charlotte. Nor did any law prevent Home Depot etc. from recouping the cost of shipping plywood, generators et al where they were in demand: gouging laws do not prevent suppliers from recouping shipping and associated costs by charging the necessary price to do so. However the contractors of Tampa were often engaged by contract on various long-term projects and would have risked law suits (or at the very least loss of long-term business) had they abandoned their promised duties: surely you don't want to toss contract law out the window! Nor do I think we ought encourage people in breaking contracts. Ever hear of ethics? But another factor also was in play: insurance companies. Most rebuilding was funded by insurance payouts and under the direct control of insurance adjustors. They simply refused to pay more than what they adjudged the appropriate price. If you want an ogre in that story, it's Allstate and State Farm, not then-Gov. Bush and the GOP dominated Florida legislature.
Now on the large question here: the laws of economics were not handed down at Mt Sinai, nor did they take effect during the first nanosecond of the Big Bang. They are at best fairly good approximations for describing human behavior under normal circurmstances. But just as Newtonian physics fails at the margins, so does Smithean economics: in situations where rationality is abandoned and emotions dominate laws of supply and and break down. This should be obvious to anyone with a grain of common sense, or the ability to observe the world without ideological blinders. (And by the way it's also why market forces don't work well in healthcare).
"Nor did any law prevent Home Depot etc. from recouping the cost of shipping plywood, generators et al where they were in demand: gouging laws do not prevent suppliers from recouping shipping and associated costs by charging the necessary price to do so."
Two questions:
1) How does the AG know what the "necessary price" is? At least, without making Home Depot go through a bunch of extra work documenting their costs? Does the cost of defending their price count towards the "necessary price?"
2) Who is going to recompense Home Depot for incurring the extra expense of shipping additional supplies (on short notice), only to have the disaster not occur? If shipping the extra supplies only earns a normal rate of return in the case of a disaster, but is a big, uncompensated expense when the disaster doesn't happen, why would you expect companies to bother to take the risk?
JonF, you actually make the case against anti-gouging laws, if you would only put the pieces together. We had shortages in building supplies and labor. Why? Because there was a housing boom. Why did we prioritize new housing over rebuilding? Because it was more profitable to build the new houses. Why was new housing more profitable? Because contractors couldn't raise prices on rebuilding jobs.
Note that these laws restrict prices even if both parties are willing to agree to the higher price. That is, if you are willing to offer a premium to attract a contractor from upstate so that you can get your house fixed sooner, you are forbidden to do so. As a result, the contractor stays put, and the wait for rebuilding in the devastated area is longer. Whose interests are served by that?
The fact that anti-gouging price controls are not permanent is not especially relevant because prices generally need to rise only in the immediate aftermath of the disaster. In the long run, prices will return to normal with or without anti-gouging laws; in the short run, anti-gouging laws cap prices just at the time when they most need to rise to attract new supplies.
It is not necessary to create supplies or workers out of thin air. We need only reallocate them from less important tasks. How do we know which tasks are more important? Price signaling. Anti-gouging laws distort or eliminate price signaling, resulting in misallocation of resources.
Long-term contracts do provide some obstacle to reallocating resources, but not as much as you would think. In the height of the housing boom, and even in the aftermath of Charley, you could readily get your roof repaired readily in areas outside the disaster area. Indeed, even during that time it was not uncommon to get cold calls from contractors who were working in the neighborhood, so clearly there was a pool of uncommitted labor and supplies. Those resources could have been used to rebuild in Port Charlotte, if it were profitable for them to go there.
I am well aware that anti-gouging laws allow sellers to recover costs, but they take a very narrow definition of what constitutes a cost. If a contractor turns down a job in his home city he risks losing not only that business, but possible repeat business. This is a cost, but no anti-gouging law that I am aware of will allow you to factor it into your pricing. Vendors who reallocate to a devastated area face all manner of opportunity costs, none of them recoverable under anti-gouging laws.
The issue of insurance payouts is a red herring. If people are not willing to pay out of pocket to meet prices above the insurance payouts, then there is no need for anti-gouging laws, as prices will be naturally limited by people's willingness to pay. Conversely, if people are willing to pay out of pocket, then all the arguments about price increases increasing supply still apply. (As an aside, my relatives took the insurance money and performed the repairs themselves, effectively reallocating resources from leisure to rebuilding, so to a limited extent you can create new supply where there was none before.)
Finally, I am well aware that the laws of economics are not on as firm a footing as, say, the laws of physics. Nevertheless, as you yourself concede, they work pretty well over a wide range of circumstances. To me, that means that the onus is on the people claiming that they don't apply in this special circumstance to show convincing evidence that they are right. As far as I can see, all the evidence points to anti-gouging laws as being superfluous at best, harmful at worst. Another commenter mentioned the Mike Munger appearance on EconTalk; he gives several other examples to illustrate this point.
I think I hit all of the points you raised. You left me a lot of ground to cover, so I apologize if I missed anything. If I had to pick an "ogre" in this situation, I would not pick the insurance companies, nor even the government. The real villain here, I think, is the human propensity for envy. The one negative thing (in some people's eyes) about markets in the aftermath of a disaster is that you tend to get service sooner if you have more money. I suspect that the reason that anti-gouging laws are so popular with voters is that they ensure that the rich suffer just as much as the poor. In practice, these sentiments and the laws they encourage cause the poor to suffer more than would otherwise. It is a classic case of cutting off one's nose to spite one's face. I suppose this must be one reason why some religious types consider envy a "deadly sin".
rpl:
Can you provide some hard evidence that stores refuse to provide goods to customers during emergencies because they aren't allowed to quadruple the price? I don't think you can. Again, I recall the runup to Hurricane Charlie (a very drama-filled day, as there were also major layoffs at my workplace that morning). The storm was originally aimed straight at us and only turned aside to hit Punta Gorda at the last minute. Home Depot was bedlam of course-- some panicky lady even hit my car in the parking lot. But there was in fact a truck unbloading plywood, duct tape etc. Home Depot certainly was not sitting on its hands! And why should they? The shipping costs are part of their normal business costs already and are built into the price of their merchansize from the start. Meanwhile they had a chance to move a lot of stuff that might have been sitting in their warehouses, and hence could make very good profits by selling stuff at normal prices.
The main reason things run out in emergencies is not economic but logistic. Again, there are no Star Trek replicators or transporters. Only so much stuff can be shipped so far so fast and all the money in the world can't change that fact. Of course in the aftermath of a truly major disaster there may be serious infrastructure damage as well-- Pensacola was all but cut off from the rest of Florida after Ivan since the I-10 and US 98 bridges over Escambia Bay were taken out by the storm surge. No amount of money can overcome that difficulty instantly.
There's also another issue here we haven't touched on. Markets depend on consumers and suppliers alike having a fairly decent store of accurate information to rely on. Emergencies may limit the information flow, and they also give rise to wildly inaccurate rumors, thereby emplowering cheats and frauds to spread deliberate falsehoods. Case in point: on 9-11-01 all sorts of hysterical tales were flying around the country (much like our panicky president that afternoon), from an invasion by Qu'ran waving fanatics to nuke strikes on the Middle East. Some unscrupulous gas station owners took advantage of the situation to raise their prices to unheard of (then) levels, some even telling their customers that their supplies were being cut off or gas rationing was about to be announced. All which was BS: gas supplies and gas demand were unaffacted. Several state attorneys general came down hard on these creeps, as well they should have, IMO. Can anyone justify this sort of behavior? If so, should we also eliminate laws against fruad on the grounds that the market will punish con-men instead? That would seem to impute a religious definition to the marlet, as if it were the Hand of God or the Agent of Karma.
Finally, to the poster who asked how people should be served in an emergency-- what the heck is wrong with first-come first-serve (unless we are talking about life-threatening injuries and the like, where medical triage should apply). First-come first-serve is the normal principal in the marketplace, I see no reason to challenge it. Is the hidden agenda perhaps that people with money, being better than lesser mortals, should be allowed to cut the queue?